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XOMA Ltd. (NASDAQ:XOMA)

Q3 2009 Earnings Call

November 04, 2010 4:30 pm ET

Executives

Carol DeGuzman - Investor Relations

Steven Engle - Chairman and CEO

Fred Kurland - CFO

Dr. Alan Solinger - VP of Immunology

Analysts

Christopher James - MLV

Susan Au - Ladenburg Thalmann

Operator

Welcome to XOMA Ltd Third Quarter Financial Results Conference Call. This call is being recorded. At this time for opening remarks and introductions I would like to turn the call over to Carol DeGuzman, XOMA’s Senior Director of Investor Relations. Ms. DeGuzman please go ahead.

Carol DeGuzman

Thank you operator. Good afternoon and welcome to XOMA’s call. A short while ago we issued a news release, which included our financial results for the third quarter ended September 30, 2010 and a general business update. Our quarterly report on Form 10-Q was filed with the Securities and Exchange Commission this afternoon. Each document will be available on the XOMA website www.xoma.com.

Today’s webcast can be also accessed via our website and will be available for replay until the close of business on February 2, 2011.

Joining me on today’s call today is Steve Engle, Chairman and Chief Executive Officer; and Fred Kurland, our Vice President and Chief Financial Officer; and Dr. Allen Solinger; our Vice President of Clinical Immunology.

We wish to remind all listeners that certain statements contained herein concerning conduct or availability of results of clinical trials, entry into a XOMA 052 development partnership or potential licensing and collaboration arrangements or other aspects of product development, or that otherwise relate to future periods are few forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934.

These statements are based on assumptions that may not prove accurate. Actual results could differ materially from those anticipated due to certain risks inherent in the biotechnology industry and for companies engaged in the development of new products in a regulated market.

Among other things, the conduct or availability of results of clinical trials may be impacted by or delayed or may never occur as a result of unavailability of resources, actions or inaction by our present or future collaboration partners, insufficient enrollment in such trials or unanticipated safety issues; and a XOMA 052 partnership may not be entered in to in the timeframes indicated or at all.

These and other risks, including the generally unstable nature of current economic conditions; the results of discovery and pre-clinical testing; the timing or results of pending and future clinical trials, including the design and progress of clinical trials; safety and efficacy of the products being tested; action, inaction or delay by the FDA, European or other regulators or their advisory bodies; and the analysis or interpretation by, or submission to, these entities or others of scientific data; uncertainties regarding the status of biotechnology patents; uncertainties as to the costs of protecting intellectual property; changes in the status of the existing collaborative relationships; the ability of collaborators, licensees and other third parties to meet their obligations.

Market demands for products; scale-up and marketing capabilities; competition, international operations availability of additional licensing or collaboration opportunities; international operations; share price volatility; XOMA's financing needs and opportunities; and risks associated with XOMA's status as a Bermuda company, are described in more detail in XOMA's most recent annual report on Form 10-K and other SEC filings. Consider such risks carefully and evaluating XOMA's prospects.

I’ll now turn the call over to Steven Engle, XOMA’s Chairman and Chief Executive Officer.

Steven Engle

Thank you, Carol. And thank to all of you for joining us today for the opportunity to review XOMA’s recent progress, including the completion of enrollment in two Phase 2 trials of XOMA 052 in Type 2 diabetes patients, to-date the largest Phase 2 program to evaluate IL-1 inhibition in diabetes, that is expected to report results in the near future

The designation of XOMA 052 as an orphan drug in the US and Europe for Behcet's disease, the first IL-1 targeting agents to achieve that designation and continued success in tapping non-dilutive sources upfront to advance our development programs such as through the $4 million sales to CIMZIA royalty stream among others.

For several reasons, I have the likened the enthusiasms around inhibiting IL-1 beta as a wave that’s building. Recently we have seen the wave grow with positive clinical results using IL-1 inhibition in gout.

Over the next few months, we expect to add to the growing rate by reporting data from two different trials of XOMA 052 our lead product candidate for Type 2 diabetes. As it was reported by the government just a couple of weeks ago, diabetes is a disease that now plagues one out of ten people in the United States. And its expected, and I know this is quite astounding, to affect one in three people by 2050.

Positive results from these studies have the potential to be transformative for our diabetes program for XOMA 052, compelling us forward and furthering towards our goal, of introducing novel therapeutics to address significant unmet medical needs and maintaining a leadership position in advancing IL-1 inhibition as a therapeutic approach to multiple diseases.

We are not the only one to be excited about the concept of using IL-1 inhibition to treat Type 2 diabetes. Earlier this week, I was invited to share the progress we have been making with XOMA 052 during the Annual Cleveland Clinic, Medical Innovation Summit which focused on diabetes, obesity and metabolic diseases. The IL-1 story and the concept to targeting the inflammatory cause for diabetes was capturing the imagination of top leading physicians and the support is growing across the industry for our approach.

We believe that XOMA 052 has the potential to address the large and growing diabetes public health crisis by modifying the course of the decease, something that current diabetes medications do not do. And you recall last year we announced positive results from our Phase 1 trials to XOMA 052, in Type 2 diabetes patients. In these trials XOMA 052 was well tolerated and demonstrated evidence of biological activity in measurers of diabetes and in biomarkers of cardiovascular risk.

With the FDAs renewed focus on safety and especially on cardiovascular safety, which was discussed at the Cleveland Clinic conference this week, these results provided strong foundation for the current Phase 2 program, which we’re conducting. As announced enrollment in the Phase 2a and 2b trials has been completed. Together nearly 500 diabetes patients were enrolled. We remain on schedule to announce interim Phase 2a results during the first half of January and top-line Phase 2b results during the first quarter of next year.

The Phase 2a trial is the smaller of the two with 74 patients enrolled. The interim results we will report in January will include data on patient responses, at the end of the first three months of treatment with either XOMA 052 or placebo in a six month trial.

We will be measuring a number of different diabetes and cardiovascular outcomes in this trial and are most interested in observing trends in the interplay and timing of these outcomes as well as continued safety evaluation.

Recall that in our Phase 1 trials we found reductions in fasting blood glucose, and C-reactive protein levels almost immediately, with effects on hemoglobin A1c coming later as we expected since it is a measure of glycemic control over time.

The Phase 2b trials has been enrolled with 420 patients are almost a 100 more than originally targeted. An indication of the growing interest among clinicians and patients to explore new approaches to diabetes control such as that offered by XOMA 052. The patients are randomized to receive monthly doses of one of four doses of XOMA 052 or placebo administered monthly for six months.

Although we would like to, for competitive reasons, we have not disclosed the dose regimens in the trial. The top line results we expect to announce next quarter would include the standard diabetes measurements including hemoglobin A1c and cardiovascular risk biomarkers, comparing the effects of treatment to very fine values in placebo at six months. This trials is designed provide sufficient data to support selection of dose levels for Phase 3 development.

In addition to our robust Phase 2 program for XOMA 052 in Type 2 diabetes, throughout 2010 we have continued to make fundamental progress including Phase 2 results in uveitis of Behcet's disease.

During the summer we reported positive results using XOMa 052 to treat acute exacerbations of vision threatening Behcet's uveitis. These results showed rapid and dramatic improvement in vision and in ophthalmic information in each of seven patient’s enrollment trial. Additional results sort of the Behcet's trial will be presented next week at the American College of Rheumatology’s Annual Scientific Meeting.

We also had presented new pre-clinical results to demonstrate potential for XOMA 052in the treatment of multiple myeloma, a cancer of blood plasma cells and in the reduction of plaque formation which leads to atherosclerosis. These cardiovascular results will be presented later this month at the American Heart Association’s Annual Scientific sessions.

There continues to be a huge increase in clinical development for an expanded number of indications for which IL-1 is known to have a role. These advances in the field directly support our XOMA 052 development efforts, enabling us to benefit from others’ investments, while we focus our resources on potential indications such as diabetes and cardiovascular disease.

For example, for the past several months, we’ve seen positive new Phase II and Phase III results in the treatment and prevention of gout, a classic auto-inflammatory disease, with both Canakinumab and Rilonacept. These new results also affirm the potential of XOMA 052 for the gout treatment we believe and are consistent with the clinical results we recently reported with XOMA 052 in another auto-inflammatory disease, Behcet's uveitis.

The excitement about our approach in IL-1 inhibition using XOMA 052 extends to our partnering discussions. We continue to engage and discuss with multiple companies and understand that a strong partnership is essential for the success of the entire XOMA 052 program.

To briefly update you are on the other aspects of our business our biodefense program consistent XOMA 3AB has expanded during the year and is expected to provide approximately $20 million in revenue, more than a threefold increase from last year.

Earlier this week we had a series of presentations at the Interagency Botulism Research Coordinating Committee meeting, which highlighted recent advances and demonstrated our expertise in the formulation of stable, reproducible multi-antibody co-mixtures for protection against multiple toxin strains; the development of anabolic formulations where the room temperature is stable and has a short life of at least a year.

And the development of our lyophilized formulation of XOMA 3AB that can be reconstituted in the field for rapid deployment in military and civilian emergencies.

Each of these advances demonstrates our leadership in this strategically important space and underpins our efforts to earn expanded government contracts we all expect leads to long-term stock piling arrangements.

In addition we were pleased to receive federal therapeutic discovery grant that recognized the important of innovation and medical research and they will provide nearly $1 million in non-dilutive funding to support our pipeline programs.

These include programs that involve novel antibodies active against metabolic diseases, and cancer targets. Although we haven’t spoken in a great deal of detail about these programs we will highlight them in the coming months as we select optimized lead candidates for preclinical development.

We have continued to tap other non-dilutive sources of funding based on our technology expertise, such as a sale of CIMZIA royalty stream, the milestone payments received from Takeda and AVEO Pharmaceuticals and the recent $2 million payment from our partner Kaketsuken.

We are working towards revenue from new collaboration license agreements that will provide non-dilutive funding to continue to move our pipeline forward. Although, it could never cover all or some of these costs, we feel this is a very important part of what we try to do to make sure that these costs are covered.

I’ll now ask Fred to review our financials with you.

Fred Kurland

Thanks, Steve. And welcome everybody to our call. XOMA had revenues of $10.9 million and a net loss of $13.6 million or $0.69 per share in the third quarter of 2010, compared with total revenues of $27.4 million and net income of $1.5 million or $0.13 per share in the third quarter of 2009.

The decrease in revenues in the 2010 period compared with the 2009 period was primarily due to the $25 million sale of the company's royalty interest in LUCENTIS in the third quarter of last year, partially offset by increased contract revenue related to work performed under a US government biodefense contract and the $4 million sale of the company's royalty interest in CIMZIA in the 2010 third quarter.

I also want to add that on that year-to-date revenues from our biodefence business are now $14.3 million, through the third quarter, right on track with our $20 million full year projection.

XOMA had total operating expenses of $27.5 million in the quarter ended September 30, 2010, compared with $20.6 million in the 2009 third quarter.

Research and development expenses were $21.3 million in the 2010 Q3, compared with $13.4 million in the 2009 Q3. Again primarily reflecting increased spending on the XOMA 052 Phase 2 clinical program.

Selling, general and administrative expenses were $6.2 million in the 2010 third quarter compared with $7.2 million in the 2009 third quarter.

At September 30, 2010, XOMA had cash and cash equivalents of $16.9 million compared with $23.9 at December 31, 2009. As Steve mentioned subsequent to the end of September, XOMAs cash position was strengthened by $2 million payment received as a final payment under antibody discovery collaboration with Kaketsuken and 1.5 million gross proceeds from equity issuances under an after market sales agreement entered in to in 2009, which has now been fully utilized.

In addition, and also as Steve had mentioned XOMA was awarded almost $1 million in grants under the US. governments Patient Protection and Affordable Care Program. Interest expense for the third quarter of 2010 was $100,000, compared to $1.3 million in the same period last year. This decrease in the 2010 amount was primarily due to the repayment inflow of the term loan with Goldman Sachs Specialty Lending Holdings in September of 2009.

Other income was $3.1 million in the 2010 third quarter, compared with $100,000 in the third quarter of 2009, this increase was primarily related to revaluation of warrant liabilities in the third quarter of 2010.

Net cash used in operations during the first nine months of 2010 was $42.9 million compared with cash provided by operations of $11.5 million for the same period in 2009. The decrease in cash provided by operating activities in the 2010 period was primarily due to a decrease in revenue received for license and collaborative fees and royalties and an increase in spending on the XOMA 052 Phase 2 clinical program.

Last month we entered into an At Market issuance Sales Agreement under which we may issue shares from time-to-time by means of one or more “at the market” offerings or in negotiated transactions.

We are not required to sell any shares under this agreement and consider it to be a prudent funding mechanism to have available in the event it is necessary, given the timing of new collaboration or licensing agreements and other non-dilutive funding sources.

In this regard, I would note our recent track record under the ATM Agreement we put in place in the summer of 2009 we did not sell any shares until December of that year and only last month fully utilized the facility.

As has been our practice for the past several quarters, we will not be providing specific guidance on overall revenues for cash receipts in Q4 2010, so it’s best to manage our ongoing negotiations for XOMA 052 and technology licensing. Excluding potential revenue from interest development activities, the company expects that $60 million in cash will be used in operating activities in 2010.

With our cash balance at the end of the third quarter in addition to the approximately $1 million from federal grants, $1.5 million from equity sales and $2 million received from Kaketsuken, the funds we expect will be available to us, we are confident that we have sufficient resources to see the company through to the Phase 2 XOMA 052 results.

Now some have asked if we will need to engage an additional financing during this time? While we anticipate that our numerous business development conversation will be successful, we of course can’t guarantee that. That is why are being conservative by nature have put into place this ATM facility, which will help our potential partners and licensees to see that we are in a strong financial position.

Lastly, during August we affected a 1 for 15 share consolidation or reverse stock split enabling us to regain compliance with the minimum $1 per share the price requirements for continued listing on the NASDAQ Global Market.

Operator this concludes our prepared remarks. Please open the call for questions.

Question-and-Answer Session

Operator

(Operator instructions) Our first question comes from Christopher James of MLV

Christopher James - MLV

Thanks, Good afternoon and congratulations on this top-line results this quarter. And my first question can you provide some clarity on the Phase 2A and Phases 2B results?

With respect to those results what do we expect to see in January, with respect to the primary and secondary points and how can we view that Phase 2A results with the Phase 2B results coming later?

Steven Engle

That’s a great question. Thank you Chris, its good to talk with you. I am going to let Dr. Solinger speak about the study and some of its attributes. Let me say in general that we would model off what we saw with Phase 1 results at similar point in time, I think its actually the same time. But we do think we got an improvement in terms of the trial design and therefore we are very interested to see what these look like.

So if you could Alan, would you go ahead and speak to the questions.

Alan Solinger

Sure. What we plan to or able to reveal is much of the primary end points. Since this is interim analysis we don’t have all of the greater [elbow] and so the end of the trial and total blind is broken.

This trial was setup particularly if you look at the trends and the timing and the kinetics of response to our drug. So this will give us a very simple, very straight-forward result for you in anticipation of the results we might see with the 2b trial and therefore start planning for the Phase 3 study or pivotal trials. Obviously some of the things that we will be after will be safety, that’s always a critical issue in the early and mid developments, as well as probably some of the initial demographics.

We are very pleased with what we have seen already as the base line demographics. The background information on these stations is very critical. I spoke to some. Both of trials are very similar to each other. Both trial have backgrounds that performs dosing. So I think it’s going to be a very simple process to converge the data.

The other thing is that in our initial stage that people look at quite frequently in Phase 1 we were only having five patients for testing group and a reduction of only a very short period of time usually they we only treated three months. We will data in a much larger cohort of patients. The first part of the 2a study, we have a total of 74 patients enrolled in that and in the 2b study we have, as Steve mentioned, 420 which many more than what we anticipated.

So, I think we have the kind of confidence that these values will be very predictive for longer term use of the drug. The other feature of this is that, this is a study looking at our drug on top of monotherapy. Every patient will be on background performance at standard acceptable doses. This should keep give a cleaner look and what is seen as opposed to the very mixed background of mix that were utilized in our Phase 1 trial. We truly want to set up to look specifically and see to more and safety in pharmacokinetics.

Steven Engle

So, just in general, to Alan points is I think that we believe that these studies are of sufficient size to give us a real look into the kind of signals but we do know with a 2a you’re really talking about study of the size of one of the arms of the 2B.

And so we think the 2A will give us a trend as we indicated in our notes earlier and rather than trying to get large distinctions and particularly, we’re trying to understand how the different biomarkers worked overtime, what are the kinetics of the effects there.

So, that’s the focus of the 2A and its really at the three month points that we’ll be giving the data. But the 2B data, you’ll have a full six months, you have the group with probably over 400 patients. So, you’re getting this completely different view of the drug at that point. So, we think both of these will provide us a very, very helpful data.

Christopher James - MLV

Great. Thank you. That was extremely helpful.

Steven Engle

Right.

Christopher James - MLV

One more question but clearly FDA has renewed interest in Phase b and you mentioned that’s earlier, what can you tell us about cardiovascular space either or IL-1 in general, specifically with respect to a major role or any potential cancer signal?

Steven Engle

Right so, we’re very lucky today to have Doctor Alan Solinger who actually got Kineret approved at Amgen before coming here to XOMA. So no one probably in the world know as much about this particular question as Alan does. Alan?

Alan Solinger

Sure, I think, just to answer that, there actually is quite a bit of data on blocking the IL-1 pathway that comes from animal studies and from so called knock out nice, showing that this is actually a safe, non-pretentious sort of approach to treatment. They are now probably quality patients who had been on Kineret for as long as probably 14 or 15 years.

So far there has been no safety signal, similar to that seen with the TNF blockers as far as opportunistic infections, or the onset of new malignancies. We put that all together with the clinical data that you will see what our competitors perhaps, the safety profile does look quite excellent and with lot of the preclinical work we’ve done and the safety data and translational medicine markers we followed in our trials, we certainly continue to see a very pointed, a very directed response to our drug with limited if any signal that would lead us to believe there should be any safety problems.

Also as far as the cardiovascular issues, it’s well known now that IL-1 plays a significant role in formation of atherosclerotic plaques and there is great deal of inflammatory response that it takes place these plaques in the artery walls. So is anticipated, that not only should IL-1 blockade not have any safety issues it might actually improve the safety profile of these patients with underlying cardiovascular disease on top of their metabolic disease such as Type 2 diabetes or the inflammatory diseases.

Steven Engle

I’ll just add to Allen’s point that the IL-1 receptor is somewhat big with us in the system, it’s in the liver, it’s in the pancreas and its in the adipose sites of fat cells and so forth and so there is number of different places that run into this regulation as a result of the regulation of IL-1 knocking it down help us. We have seen what the work that did Dr. Donath did in humans with Anakinra as well as our own work.

And you see fairly fast responses and in all those cases we have not reported out any issues with the drug, and so we think so far so good. Obviously it’s our early days and we do think that with the data coming out of this trial approximating almost 500 patients that we will have great deal of data to look at.

Last point, I would simply make is that as you may remember both we and our friends in Novartis are targeting IL-1 beta itself and we do take some solace also in the fact that [Kenemin] has been approved for caps and therefore the agency has had a chance to go looking at that.

Please also note that in addition in general a drug was approved last year as well in the same area although a very different molecule. So all of these thing give us some confidence about the safety profile.

Operator

Thanks you. Our next question comes from Matt Kaplan of Ladenburg Thalmann.

Susan Au - Ladenburg Thalmann

Hi this Susan calling in for Matt. I just wanted to ask you which conferences were you presenting at for your cardiovascular data?

Carol DeGuzman

Hi, this is Carol, Susan. We have some pre-clinical cardiovascular result at the American Heart Association meeting later this month, a focus on the formation of atherosclerotic plaque in the mouse model of a cardiovascular disease.

Operator

I see no further questions at this time.

Unidentified speaker

Great. We are really appreciate everybody being online with us today to hear about the progress that we have been making. It really is an exciting time. We think only a few months away from having the kind of results that we have been working on now for many years and we hope that those results end being positive as it will expand the opportunity treatments for patients.

We hope to see at the Lazard Life Science Conference in New York later this month. Thank you very much.

Operator

Ladies and gentlemen, thank you for your participation in today’s conference. This concludes the program you may now disconnect. Thank you and have a great day.

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